The Moorish Wanderer

Morocco: Economic Outlook 2009-2010

The holidays are up. My academic obligations will start off shortly, and I will be off for a couple of weeks. I will do my best to come back with some interesting pieces when time allows for it.

a week ago, the BAM’s governor, Abedellatif Jouahri presented His Majesty the King with the Bank’s Annual Report for 2009.

A. Jouhari, The Central Banker

I guess the team in charge of this piece had to work some extra hours, because the report came in a little late (late July instead of late August), but it was overall first class as usual. My aim here is not only to provide you with a digest, but also bring its figures together with those other facts and figures the HCP uploaded recently too.The two would ultimately give us an insight of how the Moroccan economy is likely to perform for this year.

First, the Bank’s report has a different “flavour”, if I may say so, from the other reports. 2009 was indeed a year of recession and economic difficulties, but I couldn’t help but feel a bit of ambivalence when I read the following lines about the national economy’s performance: “Cette évolution reflète la forte contraction de la demande extérieure, notamment de la zone euro, adressée à certaines branches industrielles, ainsi que le ralentissement dans le secteur du tourisme et du transport”. The evolution here is that of non-Agricultural GDP (a near-zero growth of 1.4% over the year) Then, there was this: “la nécessité d’accompagner un atterrissage en douceur de notre économie en 2009 […]” This seemingly harmless sentence hides some pretty tough economic conjecture and even thougher future policies for the months to come. A soft landing is usually an euphemism for a recession, or, in our case, a very low economic growth, something we cannot afford in the present circumstances, I shall explain why.

That was the first impression on the preface. The dominant mood suggests that our economy is already unable to sustain the present global economic downturn, and the indicators show that we are quite vulnerable in terms of economic resilience. However, before we go any further, it must be pointed out that our overall growth for 2009 stood at a good level (BAM estimates are 6.9%, something about 5% of real growth) and inflation is in the process of being maintained to low and stable levels over a certain period of time. These are good news of course, but as shown later on, no one can claim credit for them.

Let us now take a closer look to the figures laid in the documents. The consensus is that the Moroccan economy, though it has somewhat successfully dealt with the global economic recession, remains quite weak in case another exogenous negative shock comes along. And even though the public authorities invested large sums of money to support and consolidate the economy, there remains structural hardships that are yet to be addressed. Why would one talk of economic weaknesses? Well, for instance, the report points out -and this is strictly about national economics- that financial markets are far too over-valued: “[des] fortes hausses, en décalage par rapport aux fondementaux, qu’ont connus certains compartiments du marché des actifs et de celui du crédit”. It is understandable why foreign investors were a bit averse to put their money in the Casablanca Stock Exchange (CSE), mainly because the financial assets were over-valued. It spared us the painful effect of a financial meltdown (because of the toxic assets), but the speed foreign in which investments dropped down surely led to a climate of indecision and ultimately, doubts over the real values of bonds and shares on Casablanca stock exchange.

The essential thing to focus on was that it prevented the financial sector from being drown up by toxic assets, thus proving the Moroccan banks’ resilience: “Concernant le secteur bancaire, qui a fait preuve d’une grande résilience, il a vu ses indicateurs poursuivre leur orientation à la hausse en 2009. Le retour graduel de la progression du crédit à un rythme compatible avec la croissance économique n’a pas impacté la rentabilité des banques.” But it certainly has put a strain on the available liquidities: “Les évolutions monétaires et financières se sont caractérisées, dans un contexte de fonctionnement normal des différents marchés, par le ralentissement de la progression de la monnaie et du crédit“, something that prompted the Central Bank to lower the main rates and loosen a bit the required reserves: “S’agissant de la gestion de la liquidité, le Conseil a réduit le taux de la réserve monétaire à trois reprises, le ramenant à 8%, permettant ainsi aux banques de continuer à assurer un financement approprié de l’économie. Bank Al-Maghrib a, par ailleurs, mis à la disposition des banques sur le marché monétaire toutes les ressources requises et a mobilisé tous les instruments de politique monétaire disponibles, pour leur assurer un refinancement adéquat.

I. The Economic Growth for 2009. The bank admits it in its own words: the economy remained stable and relatively strong because of a remarkable harvest. And many, if not all foreign exchange-oriented sectors suffered severe repercussions from the economic difficulties our foreign markets had to deal with. The total 2009 economic growth breakdown looked as following in the graph proves the eminent role Agricultural GDP played.

GDP contribution. Agriculture saved the day for 2009

There is no need to point out that the agricultural output is subject to none of the devised policies, as it is mainly function of the current climate. Therefore one can assert that no government body whatsoever can claim credit for those 5% growth. It is however quite alarming that the industry sector should suffer so much from a contraction in foreign demand. As indeed it was pointed out, export-oriented industries suffered from the present conjecture, such as chemical and para-chemical industry (-1,4% YoY) and electric/electronic industry (-0.8% YoY) and leather (-4.3% YoY).

The other sector that suffered from recession was construction. While domestic demand remained quite strong, it did not though sustain the drain on liquidities 2009 saw, therefore bringing to an end a constant growth for the past years (construction credit growth went down from 45.6% YoY to 12.8%). I am quite appreciative that our economy did quite good in terms of resilience and growth, but the intrinsic factors that made it so were unfortunately not the result of any policy, but rather the lucky coincidence of good harvest. In terms of consumption, growth was mainly of domestic nature, something our whole economic structure does not admit as such. As the reader might know, our economy is mainly, if not entirely export-oriented: we need foreign currencies for the huge projects the policy-makers are undertaking, for our imports and to fuel up our growth with larger exports, not to mention its role as a security pillow as it were, in case of unexpected changes in commodities’ prices. But now that foreign markets had shrunk to concerning proportions, domestic demand successfully got behind the national economy. That’s how it contributed in terms of GDP growth points:

GDP Growth Contribution In Terms Of Consumption 2006-2009

II. The endogenous variables: workforce and productivity. It is true unemployment decreased a bit in 2009. But surely the present growth does not contribute in abating unemployment a bit, something that should be obvious yet does not compute in Moroccan reality. There is something else that bothers me about our own productivity. Before I go on about it, productivity is, as far as I am concerned, productivity remains one of the best indicators of how an economy is doing in terms of competitiveness and innovation. Plus it allows for scale economies, thus enabling wage rises with virtually no inflation. Morocco has quite bizzare characteristics in terms of productivity. the average relative labour cost has risen over the year. That’s a statistics that is akin to measure marginal labour productivity, something that the Bank did, and it turned out that in the last quarters of 2009, labour cost has risen beyond apparent labour productivity. That effectively means real destruction of wealth, but oddly enough did not contribute to inflation. Do let me explain: demand-driven inflation is fuelled up whenever a general or substantially located rise of wages is effective, without any form of increased productivity.

Labour Cost vs Productivity Growth. Moroccan competitivity outranged by that of countries like Poland and Bulgaria

The figures here do not show any specific growth in terms of output per capita (something below 1% in 2009 YoY) but they do suggest that labour cost has risen (about 4%). However, it does not seem to have a sizeable impact on inflation (as shown later on). It does however show that we are losing ground to much more competitive countries in terms of labour productivity.

In other terms, we are dangerously losing the ground to international competition much more productive and less costly than our own labour force. It might have something to do with unions’ wage claims, but that remains to be proven. The report does not point it out, so the real source of the trouble is somewhere else. In any case, any wage rise in nominal terms is quickly blended and its effects swiftly abated. In facts, every time the minimum wage (SMIG) has been updated, real wage increased, but gradually declined until the next pay rise comes in. And remarkably enough, real minimum wage stood at a near-stationary level, as the graph suggests.

Real Minimum Wage increases by Lump intervals, but gradually decreases to its original level if not below

This proves that, even though labour cost handicapped our foreign exchange, minimum wage, the classic target of laissez-faire partisans, had had nothing to do with. Out of contradiction though, the Bank points: “[…]Parallèlement, les coûts salariaux ont connu un accroissement, suite notamment à la deuxième revalorisation du SMIG[…]“.

III. Inflation and Unemployment: I already mentioned in an earlier post that Morocco dealt successfully with inflation (although only the core one is maintained to low levels) but that has come to the expenses of unemployment. the 2009 YtD inflation has even been made into a deflation, with CPI going as far as -5%, for an overall annual inflation rate of 1%. This has to do with the fact that commodity prices dramatically fell during the year (or in other terms, future prices went down, thus allowing Morocco to buy strategic commodities at a lower-than-expected price) and of course the positive impact agricultural output has on CPI. “Le ralentissement de l’inflation est également attribuable, dans une moindre mesure, aux prix des carburants et lubrifiants. En effet, leurs tarifs ont connu une première baisse mensuelle de 5% en février 2009, en raison de la révision des prix de certains carburants, puis une deuxième de 1,4% en avril suite à l’alignement du prix du gasoil 50 ppm sur celui du gasoil ordinaire auquel il s’est substitué.” As for unemployement, I was a bit disappointed with the way they presented it. Basically, the graph shows a trend pointing to a possible negative correlation between unemployement and economic growth. ze3ma all we need is to increase output, and somehow unemployment will decrease. It is true there is a negative correlation between non-Agricultural GDP and unemployement (F-Test shows a probability of 11% both variances would be independent. Chi-2 test shows a 98% likelihood of statistical relation between both variables) but surely a linear regression cannot capture the exact relation between both variables. The regression’s R-Square is only 10.08%, i.e about only 1 out of 10 statistical couples (xi,yi) has been taken into account. In any case, the Bank admits implicitely a weak link between unemployement and economic growth: “Malgré le recul de la croissance non agricole, le taux de chômage urbain s’est replié de 0,9 point de pourcentage pour se situer à 13,8%. Parallèlement, l’essor de l’activité agricole n’a pas entraîné de baisse du taux de chômage rural, lequel a stagné à 4%. La baisse du taux de chômage a concerné essentiellement la tranche d’âge 25-34 ans et les diplômés, dont le taux a fléchi respectivement de 1 et de 1,4 point de pourcentage. Toutefois, le taux de chômage de ces catégories de la population demeure relativement élevé, se situant autour de 20%.” On a different but related subject, I read something interesting in a digest the HCP published on poverty (I can’t recall the weblink, but you can find it here): “En effet, si un point de croissance économique s’accompagnait, entre 1985 et 2001, d’une augmentation des inégalités de 0,13% et donnait lieu à une réduction de la pauvreté qui ne dépassait pas 1,7%, entre 2001 et 2007, une croissance économique équivalente (de 1 point) n’affectait que marginalement les inégalités (moins de 0,01%), et réduisait, de ce fait, la pauvreté de 2,7% […]Il convient cependant de noter que cette dynamique de l’ensemble ‘Croissance, inégalité et pauvreté’ ne s’est pas opérée, dans les mêmes proportions, au niveau local, voire régional, provincial ou communal“. The good news are, we have less and less people living below or on the threshold of poverty, and the figures are encouraging indeed, but it has a drawback too: economic growth brings inequality too, and following these figures, every GDP growth point increases income inequality by more than just 0.01%. The HCP itself shows the figures: the 10% well-off get about 40% of the national income. This kind of income inequality does not allow for everyone to get a fair share of GDP growth, surely.

IV. Foreign Exchange:

a picture speaks more than a thousand words, doesn't it?

2009 was quite bad in for our terms of exchange: Not only did we notice a worsening deficit commercial balance, but there was a drain on liquidities too, for the deficit took its tool from our balance of payment. Indeed, “Les sorties nettes au titre des revenus des capitaux se sont établies à 7,4 milliards de dirhams, contre 4,1 milliards de dirhams en 2008. En effet, le solde négatif des revenus privés, passé de 6,7 milliards de dirhams à 9,4 milliards de dirhams, s’est alourdi de 40,6%, en raison de la hausse de 33,4% des sorties au titre de la rémunération d’investissements étrangers au Maroc“. That was the price to pay. Abdellatif Jouhari might have pointed out that our economy was resilient, however in times like these our foreign investors had to cash in their investments, and we need every hard currency dime we have. Why so? In 2009, our total national investments amounted to 265 billion MAD. ([…]“Compte tenu d’une variation positive des stocks de 38,8 milliards de dirhams, l’investissement global s’est chiffré à 264,8 milliards de dirhams, en quasi stagnation en termes nominaux, après une augmentation de 31,2% un an auparavant. Sa contribution à la croissance est revenue de 4,1 points de pourcentage en 2008 à 2,6 points en 2009 et le taux d’investissement brut s’est établi à 30,7%”.) Our national savings amounted to 228 billion MAD. It is clear that about 37 billion MAD need to be found in order to finance the huge investments our country is undertaking. That means 5% of our GDP, while the payment deficit amount to 20% of GDP. In other terms, Morocco needs to levy 195 billion MAD to a. finance its deficit, and b. to finance its investment. Perhaps the recent upgrade in Morocco’s sovereign debt could allow for new sources of finance, but again, in a time like this, and especially for the sort of investments we have, rates are going to be a bit steep I am afraid.

Now, I hope the picture made things clearer for 2009, so we can now move to the 2010 HCP figures.

Recovery signs for non-Agricultural GDP

These show signs of recovery, as it were: “La sortie de l’économie marocaine de sa phase de ralentissement conjoncturel se confirme de plus en plus en ce début d’année. Le redressement des activités non-agricoles s’est poursuivi au premier trimestre 2010, avec une croissance de 5,6%, en variation annuelle, après 5,4%, réalisée un trimestre auparavant. Cette performance a été confortée, en grande partie, par l’amélioration du secteur minier et, dans une moindre mesure, par celle de l’industrie et des branches annexes.” In other terms. the non-agricultural activities are recovering from the previous year. Domestic demand seems to be behind the green shoots: it grew about 4.7% Q1 2010, a bit low compared to Q1 2009, but nonetheless an important contributor to the expected GDP growth (3.6% for Q1 2010 so far). Things are on average going well.

There are however a few things that should be taken seriously: the present state in which public finances are is quite difficult, which might allow for cuts and austerity programs. Indeed, public income has fallen by 4.3% while expenditures rose by 13.4%. Public deficit is now 4% of GDP. Nothing urgently serious, but the forecast is that things will get rougher: because domestic demand is driving growth, there is an expectation of high levels of imports, an increase exports cannot match entirely. That means a further drain in our currency reserves as well as a worsening balance of commerce deficit. Finally, it seems the monetary market suffers from that as well: “Le marché monétaire est resté déficitaire au cours de la première moitié de l’année 2010. Les interventions instantanées de Bank Al-Maghrib ont pu atténuer, quelque peu, l’écart entre le taux d’intérêt interbancaire (3,31%) et le taux directeur de Bank Al- Maghrib (3,25%). Le marché bancaire subit les conséquences de plusieurs facteurs restrictifs de liquidité, en l’occurrence l’importance du déficit de la balance commerciale et la baisse des recettes des investissements directs étrangers.”

Foreign Investors are pulling fast, causing a drain on currency reserves

To sum up, the Moroccan economy did well in these troubled times, and those of its sectors that suffered from the global crisis are on their way to recovery. However, most of the good results are not the effects of policies, and the present structural hardships, while being addressed with various policies, remain hindering every efforts to get our economy off the valley of the shadows and into the sun. There can be no worthy growth while the present unemployement rate is 9%, nor with income inequality Gini index of 0.46. In short, the present growth still benefits to the few, and not to the many. More radical policies, that’s what we need.

Take care and enjoy what’s left of holidays.

We’re All Part of the Masterplan

Summertime. I know I am some 2 months late, but summer have just started for me. It’s quite hot in here but it is also nice, for the mind just sleeps into farniente and skips out the important issues, or rather, those one is so focused on during the rest of the year.

Last week, I watched Moroccan television. It’s not a feat. I mean I don’t have a television, and I get my information elsewhere. But last week, I saw the TV coverage of His Majesty’s 11th anniversary as King of Morocco and Amir Al Mouminine. Beforehand, do allow me to put forward a disclaimer. As a Moroccan national, I am not at liberty to, or in the position of, nor accepting to bear the full consequences of making any direct criticism to His Majesty’s person. My post is in full accordance with Articles 23, 19 & 28 of the Constitution (1996 reform).

Officials and Notabilities from all over Morocco to pay tribute and respect to His Majesty the King (Picture Maghreb Arabe Press)

No, my post is actually about two things: first, how the Television -and more specifically, Al Oula– covered the news. My second point is of a more deep matter. It has to do with the strategic decisions for Morocco. The ones that get billions of Dirhams into projects that are supposed to last decades, generations, even.

These reflect the ideological course the dominant power wants Morocco to take, and I have my reservations on that, as a citizen and would-be taxpayer. I don’t mind the Mustapha Alaoui-style coverage, nor the endless comments during the Beya ceremonial, not even the ancient pageantry brought from ancestral centuries. And In fact, I did find the Crown Prince and the Princess Royal very cute, quite well-behaved as they were.

What I couldn’t stand is the unbearable propaganda beating, so to speak. There were special programs on television flattering Morocco as a huge potential, as a country full of opportunities. It reminded me of an earlier era, in which the Throne Jubilee took place in a wider time set, with even more obvious propaganda, but nonetheless, with the same rallying war cry: “Wa Goulou L’3am Zine“. Did Morocco change that much in a decade? Yes it did. We had only one highway in 1999, some 100km long. Now, It’s an actually asphalt carpet from Tangier to Agadir (thousands of kilometres), and there’s more to come. Unemployment and Inflation rates fell over the last decade. It might be true that inflation decreased at a rate well above that of unemployment, but no one can deny the progress.

In 1999, the Islamist danger, as it were, was on the verge of explosion. It did culminate with the May 2003 plot, but on the whole, their intensity abated. Our Sahara claim is as robust as it ever was, thanks to the autonomy plan. In 1999, 61 countries recognized the Polisario-led Sahrawi Republic. In 2010, Only 32 continued to do so. The liberal-oriented Moudouwana reform finally recognized gender equality, even as a principle, and a recent poll suggested it is supported by the majority of Moroccan women. On the whole, We enjoy much more liberties than a decade before.

That’s what we are told, anyway. And even though there are some elements of truth in this enthusiastic and optimistic speech, it is quite far-fetched to say that, first, Morocco is going the right way, and second, all these changes benefit to the Moroccan people. I watched for the whole week the Evening News.

I know, I could’ve skipped these and watched something else, on another channel, but again, as a would-be taxpayer, I am keen on looking for how the money is spent on the Public TV network. Let me be more specific in my criticism. The first is obviously about the exaggerated optimism. I don’t know about Al Oula staff, but I am quite concerned about our economic resilience, and even more concerned about social cohesion and rising inequalities among our society. What is more frightening, these so-called “Grand Workshops” are, I suspect, benefiting mainly to the well-off of our citizens, and it is unlikely to be of sizeable benefits to the less fortunate of our people. That, I can only speculate on, although with some rational basis.

In any case, I thought we were no longer to be fed with this grotesque propaganda, or at least that something has been done in order to alleviate its awfulness a bit. It seems that is not really the case, Mustapha –His Master’s Voice– Al Alaoui might have been replaced by someone else, the tone remains the same.

His Majesty with Gen. A. Bennani, Prince Royal Rashid, Crown Prince Hassan and Princess Royal Khadija (Picture Maghreb Arabe Press)I would like to turn next to the Royal speech. The following is not a comment on what have been said, but rather, the starting point of my proof. The speech has been wonderfully clear about the strategy. His Majesty underlined four main areas upon which He pressed government and officials to focus on."La nécessité de veiller à ce que l'Etat, sous Notre conduite, assume le rôle stratégique qui lui revient dans la détermination des options fondamentales de la nation, la réalisation des grands chantiers structurants, l'impulsion, l'organisation et l'encouragement de l'initiative privée et de l'ouverture économique maîtrisée."The state referred to is not government work. It has been long admitted -and accepted de facto- that the essential government work is not carried out by the elected government of M. Abass El Fassi, but by a dense network of agencies, foundations, autonomous authorities, all of which are partially free of Parliament and Governmental check, effectively under the King's supervision, who appoints their heads by Dahir. That of course, is a matter of institutional policy, upon which I shan't go through. We need a constitutional reform that should seek People empowerment, period."Quant au deuxième pilier, il consiste en la consolidation de l'édifice démocratique. A cet égard, Nous n'avons cessé d'oeuvrer au raffermissement de l'Etat de droit et à la mise en oeuvre de réformes profondes en matière juridique et institutionnelle, ainsi que dans le domaine de la protection des droits de l'homme."It is true sizeable progress has been made on this decade. The IER (Instance d'Equite et de Reconciliation) was without precedent in the MENA region. And even though their recommendations are yet to be fully implemented, there is a great deal of progress to be achieved. Oddly enough, it looks as though this comes as a belated answer to the stern report Amnesty International on the Police-state excesses Morocco lived the last few years, mainly on Press-State showdown and against Sahrawis activists. In any case, the progress made during the last 10 years is step by step squared ans squashed by a growing authoritarian policy."le troisième pilier constitue une nécessité impérieuse. Il s'agit, en l'occurrence, de placer le citoyen au coeur de l'opération de développement, comme Nous l'avons concrètement démontré à travers l'Initiative Nationale pour le Développement Humain qui a permis d'enregistrer, sur une période de cinq années, des résultats tangibles dans le combat contre la pauvreté, l'exclusion et la marginalisation."The early HCP data, as well as that of INDH office do no necessarily validate the idea deadlines were met on poverty struggle. I took a leaf of the HCP Social Indicators. For instance, between 1998 and 2007, child poverty (Children aged below 18) fell from 20.8% to 11,3%. Thanks to the good work carried out by local charities, as well as the INDH funding. This figure, 11.3% remains, by international standards, quite high. When compared to our MENA neighbours, like Egypt (9%), things are not all that good. The trouble is, it is not enough to make progress,it has to be in line with what other developing countries are doing, and in this case, we can't claim much credit when everyone does better, can we?Overall poverty with Urban/Rural breakdowns

In the same document, data indicates that poverty was cut down in a much larger proportion in the rural areas: “Le taux de pauvreté relative a connu entre 1998 et 2007, une baisse substantielle passant de 16,2% à 9,0% à l’échelle nationale (recul de 7,2 points). Par milieu de résidence, cette baisse est plus prononcée en milieu rural (de 24,1% à 14,5%) qu’en milieu urbain (de 9,5% à 4,8%).” Ok, good news. However, if the overall poverty abated, it is mainly due to the fact that most of it is of rural source. For instance, the 1998 figure points out that rural poverty makes up for 68%. In 2007, it went up to 70%. It is obvious that because rural poverty went down in absolute terms, overall poverty should do the same, but on a relatively smaller scale. The core question remains: what actually happened so that rural poverty was brought down? Is it because of the INDH effect?

The graph shows two distinct trends with the lowest point/boundary on 2000

Following the figures I found on this website, it seems that Agricultural production was on a high trend between 2000-2007 and on the opposite trend in the couple of years before. It is of economic trivia to assume that when the agricultural output is up, rural poverty, in absolute terms at least, goes down consequently. There is proof of that statement in various academia, but one cannot categorically state it as a fact holding for Morocco. We can assert however, that the income effect played a larger role than any hypothetical influence the INDH has, the income being mainly determined by how much it rained, no policy influenced thus the output growth.  One last thing though: No matter how good and involved the policy makers were in fighting poverty, income inequality, the supreme indicator of social justice, has risen in the last decade. Following the HCP figures, in 2007, 10% of the overall population fielded 40% of the national income. In 1998, they accounted for 30%. In other terms, and bearing in mind the national cake (i.e. the GDP) rose in real terms in a decade, the 10% most wealthy got a bigger share of a bigger cake. But of course, the main objective is to fight poverty, exclusion and marginalization.

Le quatrième pilier réside dans la volonté de doter l’économie nationale de moyens permettant sa mise à niveau et son décollage, pour la réalisation de projets structurants et la mise en oeuvre de plans ambitieux, lesquels ont d’ailleurs commencé à donner leurs fruits sur les plans stratégique, sectoriel et social.

The infrastructure, i.e. Airports, Highways, Seaports and Sea-terminals, all of which are necessarily indeed to our economic growth, do not necessarily benefit to the many, and I suspect it does only to the few, an idea I am about to expand.

the 10% well-off are eating up a bigger slice of the national cake

The “Maroc Vert” strategy, to start with, in every aspect of its guidelines, seems skewed towards large and mechanized agricultural fields. La Vie Eco drew up an interesting account of the strategy. Broadly speaking, the Plan articulates two sub-strategies, the second of which involves develop ping small agri-business:

Le second pilier du Plan Maroc Vert vise l’accompagnement solidaire de la petite agriculture à travers la réalisation de 545 projets d’intensification ou de professionnalisation des petites exploitations agricoles dans les zones rurales difficiles, favorisant ainsi une meilleure productivité, une plus grande valorisation de la production et une pérennisation du revenu agricole. Ce second pilier a également pour but la reconversion de la céréaliculture en cultures à plus forte valeur ajoutée (ou moins sensibles aux précipitations) et la valorisation des produits du terroir.

I have great doubts about this. While the first sub-strategy, the one targeting large farms and agro-industry has a large financial support of public money (The Agricultural Development Agency puts forwards a figure around 80 billion MAD) the money is made available for 961 projects with only 562.000 farmers (Fat farmers If I may say so), on the second part, 545 projects for 855.000 farmers (Those that should be helped and supported) get no more than 20 billion MAD. In other terms, and under the provision all farmers benefit from the Plan Maroc Vert, 39% of the farmers (most of whom are quite wealthy) get 80% of the funding. If it is a development strategy, it is a top-down one, with all the effects on inequality and income gap that are already there, and very likely to grow, especially with the practical procedure the PMV seeks to implement.

Aggregation, as the PMV calls it, is defined as follows: “L’agrégation est un partenariat volontaire entre différentes parties pour la réalisation d’un objectif commun. Ce système repose sur le fait d’intégrer un certain nombre d’agriculteurs (agrégés) autour d’un acteur (agrégateur) disposant d’une forte capacité managériale, financière et technique lui permettant d’optimiser le processus de production.” Of course it is. Unfortunately, there is little to be said about the balance of power, or any negociation balance between say, farmer a and smaller farmers x1, x2, … xn. Because in the final analysis, an even though the agrégateurs has to deal with irregular supply, they can always find another way round to it, while the little farmers cannot do otherwise. I would prefer this aggregation strategy to be working solely with cooperatives, because that’s how they do, and it is close to my heart, ideologically speaking of course.

But because our wealthiest farmers are not -and far from it- cooperatives, this aggregation thing is certainly going to be a diktat from the strong to the weak. There is a lot more to be said on the PMV, but I think I made my point: It benefits the few, not the many.

Haleutis: That one bears similar features to the PMV. However, it seems Europe has an interest in it. According to this website, the strategy aims to: “Le plan ” Halieutis ” prévoit la concrétisation d’un certain nombre de projets phares de transformation et de valorisation des produits de la mer, avec à leur tête la création de trois pôles de compétitivité, à savoir Tanger, Agadir, et Laâyoune-Dakhla, devant mobiliser des investissements de neuf milliards de DH.” Oh, that’s a De Facto recognition of our soverignty over the Sahara, or at least, over the fishing sea of it anyway. It goes on:

L’objectif ultime étant la mise en place d’un système de gouvernance sectorielle permettant un transfert de pouvoir graduel aux régions et au secteur privé. En parallèle, un travail d’organisation du secteur est lancé à travers l’organisation de la représentation professionnelle et l’encouragement d’une interprofession. Ce faisant, le secteur de la pêche marocaine bénéficiera certainement d’une synergie des efforts et d’une bonne gouvernance à la fois nationale, régionale et locale de nature à fédérer tous les opérateurs autour des décisions majeures bénéfiques pour la gestion et le développement du secteur.”

There is considerable doubt about any governance changes. For any Moroccan national, a fishing permit goes along with an “agreement”, the famous grima as it were. Powerful lobbies are using and abusing the system on that one, and I don’t believe there is going to be a real transfer of power to the private sector, or the regional authorities, or at least, it won’t be done so without heavy resistance from those living off the present privileges and perks. In any case, the deadline is 2020, so there is plenty of time to make the necessary changes, and let us hope for the best.

La Vie Eco discussed the strategy too. They did point out that, despite a coast of some 3500 km, the sea product consumption is quite low (some 12kg per capita following their figures) and the sector remains below its full potential. On Haleutis, I think it is wait and see.

Tourism and the 2020 vision: I think it is safe to say that we couldn’t make our 10 million tourists in 2010. The figures show that the main objective of 10 millions of tourists is a failure, Former Minister Bousaid admitted the facts, when he said the plan was way too ambitious. He was sacked and replaced with a young thristy technocrat that asserts the opposite. The objective itself is just the tip of the iceberg. Alongside, huge infrastructure investment were made, with billions of dirhams (about 70 billions MAD ) for some projects that were either abandoned (like Taghazout) or with actual low economic benefit to the locals. For instance, this article provides unvaluable insights of how leisure projects were forced on locals because it is a “machrou3 sidna” (His Majesty’s project). No credible study of actual economic outcome for the locals, no serious study of the enviromental impact. If it was not for their Gran

de Ecoles diplomas, I’d say the policy makers are jokers.

These are but a few points I wanted to discuss. There are other sectors within this Grand Design,  following this portal, and for some, sizeable progress has been made, it must be reckoned with.

2010 Objective too ambitious, says former Tourism Minister

However, I cannot but stress on my own diagnosic of the ongoing trend: Unless the present course of policies is shifted, the effect the current decisions have on Morocco’s future are going to be extremely random. It is true less and less people are living in poverty. It is also true that the gap income as well as social inequality is growing, carrying with it the seeds of resentment and social ras-le-bol.

The present set of policies does nothing but exacerbate it further, and I fear the policy makers are going to reap an unpleasant harvest of sorrow and anger.

Le second pilier du Plan Maroc Vert vise l’accompagnement solidaire de la petite agriculture à travers la réalisation de 545 projets d’intensification ou de professionnalisation des petites exploitations agricoles dans les zones rurales difficiles, favorisant ainsi une meilleure productivité, une plus grande valorisation de la production et une pérennisation du revenu agricole. Ce second pilier a également pour but la reconversion de la céréaliculture en cultures à plus forte valeur ajoutée (ou moins sensibles aux précipitations) et la valorisation des produits du terroir.

S&P is Moody, Fitch is grading the rate

Theres little to be discussed seriously on the home front. Perhaps the Amar/Gazhaoui matter; No, too banal I am afraid, and we are in the process in making it so indeed.

There was something I wanted to discuss a couple of months ago but I lacked time but then again, and with the benefit of hindsight, the issue would be clearer and therefore easier to deal with.

For those of you with interest in economics and finance, you heard about the grading improvement on the Moroccan sovereign debt. In a nutshell, according to the grading agencies (like Standards and Poors, Moodys, or Fitch), Morocco is now safer to invest in (the assets bear less risk and are more liquid than before). Presumably, this is good news for the economy, especially with regard to the tightening global economic conditions. The business cycles likely trends are still on the downward slope (with little glimpses of recovery here and there, but not enough to reverse the tendency), so actual money is tight, therefore making credit opportunities rarer.

screen capture of the S&P announcement

Indeed, goods news because from now on, Morocco is Investment-Grade approved. Namely, bonds with grades ranging from AAA (the strongest and highest rate) to BBB. And we are now in a chance: since March 23th, 2010, the main grading agencies changed their ratings favourably on the various levels of debts the Moroccan government services to foreign holders.

The fact Moroccan sovereign debt went Investment-Grade allows for a new batch of investors to put their money in our economy. Indeed, the UCTIS III regulations provide for a particular kind of financial instruments all related to Money market. A new surge of money with which the government can put into practise the policies that would enable growth and wealth for the Moroccan economy. A fresh influx of money could also mean a renewal of our debt structure, a specific aspect that shouldnt be overlooked.

I believe this piece of good news is not really one. Yes indeed, the economic outlook seems stable, but on the other hand, Morocco is gasping for fresh foreign currency. It may seem a surprise, but the foreign exchange terms are absolutely not in our favour, as indeed the commercial balance deficit is worsening, and we desperately need, one way or the other, to finance it. Either by engaging the reserve currency or by calling up money on the international markets (the latter is now even more possible with the rating improvement)

The reserve currency has always been a nightmare for the Moroccan economists (and to the economic journalists as well); they were already alarmed in 2009 about it then, and have every reason to be alarmed now (as you may notice, the announcement effect takes time to be felt…)

Let us first list some facts and figures on our economic resilience in terms of currency holdings;

According to the quarterly statistics digest (N°123, March 2010), the Central Bank claims 187.392billion MAD on currency holdings. The holdings are mainly convertibles (96%), a liquid holding that enables BKAM to intervene whenever needed to in order to balance the books, i.e. hold he dirham value or finance indirectly imports.

Net Foreign currency holdings 2010 Q1

The 2008 Annual report rightly points out that this level enables for 7 months worth of imports, compared to 9 months the year before. It mainly goes back to the terms of trade; basically, our exports in terms of value do not match our imports. Though it is more of a structural nature, the exports did worse with respect to the past years. Without too much detail, the exports in the late 1990s used to match ¾ of the imports, but since 2005, only half of it was met (between 48 and 50% worth) which means a drain in reserve holdings. A current account deficit can be addressed in the course of the following actions:

* improve our exports monetary value is the most straightforward yet difficult policy

* choke the imports is virtually impossible (where one can get the oil and hardware from?)

* find the money to finance the deficit with foreign direct investment (FDI) which is now more possible with the ratings change.

Treasury Debt structure Domestic/Foreign

Like many countries that when through the painful process of structural adjustment in the 1980s, Morocco learned its lessons on foreign debt. In facts, it looks as though the top brass are trying to do anything but to borrow some money on international markets. Now the grading changed, they might go for it, which would not be a good idea now (yield curve 10+ indices).

The feat then-finance minister F. Oulalaou accomplishednamely, halving foreign debt by half in 7 yearscame to the price of local debt.

(Bloomberg, Finance Ministry)

As shown on the graph, Treasury rate of return outperformed stock exchange volume and cap (which has an effect on required return) It is quite unique in finance theory of course, but the Casablanca stock exchange is known for its over-capitalization, as well as the relative non-liquidity due to a high concentration of assets (the ONA-SNI theory holds firm even after the merger)

There was indeed a liquidity excess on the markets that enabled the government to issue T-bonds and T-bills at low premium (and thus, at low cost) and achieve a two-fold policy: keep inflation low (by taking away the liquidity instead of letting it flow through) as well as get their hands on cheap and harmless borrowings to carry out their policies.

Nonetheless, this state of grace ended with the flow of liquidities. The effect of structural balance deficit was emboldened by the decrease in expatriates (MRE) transfers. The Q1 2008 saw therefore a noticeable tightening in liquidity, which prompted the central bank to lower their main rates in order to get the show on the road.

On the other hand, public debt no longer was attractive (the stock exchange returns exceeded the public debt returns), and now that some of the middle and long-term arrived at maturity, a small yet distinguishable dip in the ratio domestic debt/GDP. This, combined with the worsening of commercial balance, put a heavy strain on the government to call up some fresh, foreign money.

They have to. Let us take a look at this simple but always true equation:

GDP = C+In+G+(X-Im)

Where GDP is the gross domestic product C consumption, In investment, X exports and Im imports.

On the other hand, Investment and total income are tied. In facts, the following equation depicts the relation between savings (the non-consumed income) and investment (earmarked to replace or expand means of productions):

CA = S-I

(Where CA is the current account, S savings and I the domestic investments)

The late equation can be computed into the first one, and thus:

GDP = C+G+(X-Im)+(S-CA)

Government spending is assumed to be exogenous to foreign trade. Consumption, on the other hand, can be function of imports (we do after all consume Turkish, US or Egyptian goods, dont we?) Furthermore, we can assume now the savings are indiscriminate between domestic or foreign;

GDP = C(Im)+G+(X-Im)+( S-CA)

(for anyone interesting in a more detailed and rigorous approach, this San Francisco Fed reserve working paper is a real bliss)

Now, (X-Im) and (TS-CA) need to be balanced: the first term needs to be financed by means of the second. It so happens that the commercial balance worsened the last few years, which means a negative value for (X-Im). In order to finance the deficit, we need to increase by the same proportions (or higher) the deficit itself, namely, by calling up foreign savings (i.e., FDI). Why foreign? Why cant we use the domestic savings? Two main reasons: either because we dont have much or it does not satisfy itself with the present returns.

For a fact, we know that R=C+S (where R is the total income) we also know that imports are a parameter in consumption behaviour, so R = C(Im)+S. However, we do know imports have risen quite substantially over the last 3 years, much more than the total income, indeed, R < C(Im), which makes Savings smaller in relative terms.

Bottom line is, sooner or later (and I believe it would be sooner rather than later) we will have to turn to the international markets.

Because of the present situation, the bonds issued are going to be expensive for Morocco (i.e with high premium rates, in order to attract investors) and thats were the danger lies.

Short or Long money do not cost the same, and its own use will affect its efficiency as well. Let us assume the brass goes for short money because its cheaper, short-term rates the US Fed, or the ECB or Bank Of England took up are at their historical lowest; Morocco needs to put the money into high-return short positions; They cannot sanely put the money into a long-term public investment, of course. In facts, its just a temporary patch-up plan with little help on the whole situation. Long-term borrowings are just too expensive, and the required rate of return is too high for the initial borrowing to be of interest. [Edit: they did, as my predictions turned wrong]

Whats to do then? The decision to borrow a larger amount of foreign money is inevitable, and in itself, is not that harmful.

The core question is two-fold: what kind of money do we need to borrow, and what sort of expenditure should we pay for? The first term is directly linked to the second. But because we have no idea what is the public policy on that matter, we can only speculate. And this is typical of an opaque governmental institution. When politicians are not pressed for electoral results, when they are not accountable to their constituents, and indeed, when the pursued policies are not in the interest of the many but to that of the few, the decisions usually lead to under-optima solutions.

The Case Against Monopolies

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on April 26, 2010
I speculated earlier on the need for a hypothetical government to nationalize private monopolies in order to crush any ‘financial coup d’état’, under the condition that theses trusts should be re-privatized in smaller bits, in order to get the competition going (I thought something of 4-5 years is a good reference) However, I failed to prove my point (rigorously I mean) And indeed, how do we assess the previous hypothesis? How do we prove that 

a). these companies enjoy private monopoly over some, not if all, vital consumption goods

b). these goods are quite important to Moroccan households, who are very price-sensitive to any changes.

Before that, I will just develop some basic microeconomics theory on Monopoly. The starting point is about how a company charges the ‘market price’, if it has any grip on it. We do assume that prices are exogenous to any market player; it seems that price-taking process, the core structure of market economics, is ignored by the companies, though they cling to the very idea of open markets. That’s a contradiction in terms, since a true market economy is not rent-providing, or even profit-providing in market equilibrium.
Coming back to pricing process: in an ideal world, the firm adapts itself to the market price by adjusting to its marginal cost (i.e; with reasonable extrapolation, the marginal productivity of its inputs). Second year economic students do know about that graph I believe:

As long as market price is above the marginal cost, the firm will produce till it reaches the optimal* quantity (which, in comparison to other market situation, is the highest) for a social equilibrium.

You know what? This has never existed, though many economic and financial models base their assumptions on a near-perfect market structure (after all, Hedge funds were once described as ‘market clearing mechanism’, enabling security pricing to be more efficient). Nonetheless, in a true market-competitive structure, a single company has a very small margin on prices and quantities, so they do take price market as a given or rather, in their majority, follow a ‘signal’ (another subject to be discussed in another post perhaps)
The Moroccan economic structure for the described goods is closer to what A. Marshall described as a rent economics. He had some interesting thoughts on the matter: “It has never been supposed that the monopolist in seeking his own advantage is naturally guided in that course which is most conducive to the well-being of society regarded as a whole, he himself being reckoned as of no more importance than any other member of it. The doctrine of Maximum Satisfaction has never been applied to the demand for and supply of monopolized commodities.” He then goes on: “The prime facie interest of the owner of a monopoly is clearly to adjust the supply to the demand, not in such a way that the price at which he can sell his commodity shall just cover its expenses of production, but in such a way as to afford him the greatest possible total net revenue.”

Clearly, the academic definition of a monopoly is quite revealing: there’s nothing beneficial for a society from a monopoly –save perhaps for the monopolist themselves-, in that sense that they capture the consumers’ surplus (the premium between the market price and their maximum reserve price), the captured surplus is therefore a rent, which is in turn spent as dividend –rather than investments as we are ld to believe in our ‘national’ economic model- to the wealthy.

There’s of course a fine line between a ‘Marshallian’ pure economics and the actual and factual economics we are dealing with. In facts, absolute/pure monopolies do not exist. However, in a more refined economic theory, duopoly and strong-form oligopolies do replicate the same pricing methods, but in a two-times model. I am of course referring to the Cournot/Stackelberg models, for which we need to understand the academics underlying before we can go further: indeed, aggressive moves on prices at a particular market does not necessarily mean competition (and therefore, outcomes to the benefit of consumers) since the tides could change to a much less price-friendly market structure. Basically, the Cournot model starts with the ‘best response’ strategy each company draws up against their competitors, they end up producing with monopoly quantities (because of their respective strategies) each firm enjoys a captured portion of total demand, but cannot charge it with the full marginal revenue, so they end up charging the pure competition market price, namely their marginal cost.

The general assumption is that all competitors enjoy similar cost structures, and subsequently, the same marginal cost (save for the fixed cost) otherwise; the one with the lowest cost takes it all. Despite its simplistic assumptions, the model could, for the available data, provide interesting insights on how particular markets are doing, and how some companies are taking advantage of it.

The Stackelberg model is even more accurate; the dynamic dimension is more important, and in our case, suits perfectly the edible-oil market: there’s a leader that has a first-move advantage, and can subsequently use an advantage it has –in it’s cost structure that would be discussed later on- to fix a certain amount of production that would, in the long run, simply oust any serious competitor, and leave little of market shares to the smaller followers.
Let us just have a look at two sets of the main consumption goods for a Moroccan household, Edible oil and Milk derivatives.

* Oil derivatives:

I’ve always wondered: how many firms are there in the Oil derivatives market in Morocco? Yes, we know Lesieur-Cristal, a notable subsidiary of the well-known SNI-ONA Holding, and according to their website (you’ve got to give them credit for that) they own the following products;

– in edible oil sub-sector : Huilor Graine d’Or Lesieur Plus Oméga 3 Lesieur FritureSafia Cristal Oméga 3 Cristal Friture Cristal Maïs Oléor

– in olive oil sub-sector : Jawhara Cristal Olive MabroukaSalamZitouna

That’s a lot of products, and anyhow, no competitor in the market is strong enough to field the same product portfolio, so it’s a lost cause for any challenger… (And, If I may, you sell oil if you want to, Lesieur’s not for leaving.. I know, my puns are terrible…) The Oil market is notorious for the fierce rows that sprung between the incumbent monopoly (i.e. Lesieur-Cristal) and any strong-hearted competitor trying to get in, most notoriously Savola; Unfortunately, our good friends the medias (the newspapers of course) consider it to be the very image of a healthy competition, or, in simple terms, a competition. Of course, I can understand that a journalist has a weak grasp of proper academic definitions (I mean, the Journalists’ school doesn’t graduate specialists) though I feel they are mixing market competition and Cournot-like competition. Let us for a moment assume their primary market is the consumers’ basket of goods (namely, 8.6% of the national average consumption as defined by the HCP) the Median told us that overall edible-oil market is roughly divided up between three main firms. It evolves around something like 80% of the Market for Lesieur, Savola & Huiles du Souss… I know, I couldn’t hold of proper data so I had to make some very extensible extrapolations). These companies have none but the price to attract the consumers. And seemingly the price range is wide enough (8 to 12 MAD/Lt) to create specific niches for each competitor;

However, these prices come to a cost, not really the marginal cost, but on the total –or sunk- costs: Lesieur-Cristal has a tremendous advantage, for their incumbent status allow them to keep fixed costs quite low; their balance sheet does show up a relatively low (their intangible fixed-asset ratio is around 71% for 2009 figures) and therefore, can afford to go further down their theoretical marginal cost. The Cournot model does assume the equilibrium price eventually settles at the lowest marginal cost. However, the main competitors are going in for a dumping, making the fixed cost –or, in Savola’s case, the entry cost- the ultimate efficiency criterion. Savola could cope with dumping, but certainly not for long, and I wouldn’t be surprised Savola would quit (which it did, eventually) All in all, Lesieur-Cristal is now in a near-monopoly situation, with a huge rent-situation, that is not invested –as we might hope- but rather spent in dividend-distribution policy. Because no substantial investment was made, they managed to increase the total distributed dividends to 187Million MAD, something like 44.68% over the year. Actually, they could have distributed twice the amount as they settled for an overall self-working capital of 300M MAD which can be virtually wholly distributed (save for the legal compulsory reserve), that’s a nice rent the Moroccan people are paying for… to give you an idea of what we might do with it, the 2009 Budget devoted a similar amount to the Wildlife & Forests departments (145 Million MAD investment allowance) or to the Families & Social affaires department (195 Million MAD) or even the jails and prisons office (264 Million MAD)

– Milk derivatives/eggs

Let us just focus on the Milk derivatives (it so happens egg-production is relatively out of line here) I can still remember the cooperative Jaouda struggling successfully against the other SNI/ONA-subsidy (come to thing of that, SNI/ONA are everywhere, quite disturbing !) How do we make up for this one? Is the market really ‘competitive’? First off, Jaouda (or shall we say, the Copag) is a cooperative, it works with a different economic paradigm (they do try to maximize their profit, but their cost structure has an additional term that changes that changes somewhat the classic optimization scheme, anyway, I think this article is quite interesting to read) the fact is, Copag is treating the local farmers with a win-win co-partnership, which allows for a steadier rate of profits, though at any rate Copag is posing a serious threat to Centrale Laitière.

Of course, they are taking away market share bits, but it does certainly not affect Centrale Laitière profits as we can draw up from their financial statements (2009): They managed to get 1Billion MAD in terms of cash result, which enabled them to distribute dividends for a total amount 461 Million MAD (2009). [Again, that could provide money for 5 regional departments for the Education ministry investment’ allowance] The idea of dismantling Central Laitière and selling it by bits to local cooperatives is, I believe the right move for a government to ensure a lower market price and a fairer distribution of wealth, instead of spending it all on dividends to the wealthy.I shall devote another piece on the oligopolistic structure of the Moroccan economy –or at least, for some of the essential goods- and the need for a genuine democratic government to crack down radically this intolerable rent-seeking economics. I would be quite interested to write something on the ‘grima’ system; it looks as though the whole economic structure moves in a bizarre and rather unhealthy paradigm, namely the permanent quest of comfortable and effortless rents, just like ‘grima’ seekers.

Basically, these firms that supposedly proud themselves to be leading the Moroccan growth are just following the same old scheme of rent-seeking, of course with much modern management techniques, but the fact of the matter remains what it is: Moroccan capitalism follows ‘grima’ scheme. It became so much of a norm that even the Cour des Comptes acknowledges the fact in many parts of their 2008 Report:

Il a été relevé que l’octroi de l’agrément ne repose pas sur des règles précises” or “En terme d’agréments octroyés, l’évolution du nombre des agréments octroyés permet de constater que […]1749 agréments ont été accordés en cinq ans, soit en moyenne 350 agréments par an. En dépit de l’amélioration constatée dans l’évolution annuelle du nombre des agréments d’une année à l’autre, il convient de souligner que les 4445 déclarations d’intention de création exprimées entre 2003 et 2007 se répartissent comme suit:

• 1829 déclarations seulement ont été suivies par des demandes d’autorisation, soit un taux de désistement inquiétant de près de 60% de la part des déclarants;

• 1749 agréments seulement ont été accordés, soit un taux d’agrément de 39%. Ce taux modeste trouve son explication, en partie, dans la lourdeur remarquable de la procédure […]

All in all, temporary nationalization is not the pristine and flawless strategy we might think of. It is only the governmental move to deal with private monopolies and oligopolies. The ‘grima-seeking’ mentality, on the other hand, cannot and will not be done away only by abolishing these rents: to abolish oligopolies means also to abolish the licenses-approval system as well.

Markets, Innovation and Competition

Posted in Dismal Economics, Read & Heard, The Wanderer, Wandering Thoughts by Zouhair ABH on July 4, 2009

To quote Immanuel Wallerstein ‘Only a monopoly could pursue innovation (as a way to secure and expand its rent)’.

Though this statement is purely abstract, many examples come to mind when it is about innovation : apart from Edison-like geniuses, market innoation comes from large, oligopolistic or monopolistic structures : Apple with its Ipods and Iphones, Microsoft with Window and Internet browser (Albeit threatened by newcomers)…

The sum of examples is too large to be presented in length. One the other hand, economists from the dominant stream advocate strongly the idea that only free markets could bring about wealth, well-being and subsequently innovation (as part of the positivist ‘progressivism’ competition makes shared among agents)The main issue, therefore, is an attempt to find out about the various relations markets, innovation and competition have with each other : Could market competition encourage innovation ? How can innovation be measured in an economy ? what changes does innovation make within market structures ? The present article will present (or at least will try to) a proper definition of innovation, as a first step to understand mechanisms behind market changes. Secondly the readers will get acquainted with various theories contradicting the previous thesis, essentially on the point of competition. historical evidence shows the large role monopolies assumed in the global innovation, throughout human history. Finally, One will show that, though competition is for innovation to emerge, monopolies store undeniable advantages in controlling and improving it.

When an economist presents the free market as beneficial for innovation, they have in mind the following reasoning : an individual firm makes profits when its marginal cost is below the market price (one assumes the firm operating in a pure and perfect competitive market). Innovation intervenes when a firm makes a ‘discovery’, namely, a new combination of factors of production that produces more output for the same amount of input. In that sense, innovation is nothing more than a new combination of Labour and Capital, that increases significantly their marginal productivity.

So, a firm in a competitive market has a strong incentive to innovate, in order ot outsmart their competitors, and to increase its share of profits. In the short term, consumers benefit from competition, as the quality of goods improves (thanks to a better combination of means of production) at the same price, or even lower. In that sense, a free and competitive market presents all the incentives for companies to innovate, at least for the short run, since their innovation combinations -as a knowledge/information- are bound to be known to the market (fluid and transparency assumptions hold) and therefore neutralising their initial advantage. The theory seems perfect. Perhaps too perfect, as the real world differs significantly from the one pure microeconomics builds.

Game theory, as well as actual corporate behaviour tend to be more accurate in dealing with the innovation issue : a famous economist, H. Varian, wrote an article about network and high-tech economics, an article one should look at very closely : in an innovative market, two variables tend to contradict some of the important assumptions of free markets theories : transparency and fluid information.

A firm has the choice (or not) to undertake R&D studies, a decision that could cost a certain amount of money. As a rational agent, the firm has to guarantee sizeable returns over this investment : returns of investment have to outbalance their initial cost. Firms could for instance, develop some kind of restriction to the use of their innovative goods : Microsoft protects its software and forbids their uses to get to the original code-source (namely, the very heart of the software, which could be altered). Patents could also guarantee a rent to the innovative firm, by protecting its innovation. Those two pattenrs of behaviour contradict indeed the very heart of free and competitive markets : free information.

Another way of looking at the matter would be the ‘free rider’ theory : in a relatively open market, a firm could just wait for innnovation to ‘pop’ and grab it. The free rider firm would be actually happy to get a small but stable rent on the market, by adopting a ‘follower strategy’. In that case, and if all firms were to follow the same reasoning, no innovation would be expected.  In a monopoly though, things are different : as many economists put the stress on it, a competitive monopolistic market could be innovative, but to make sure that no potential newcommer would get into the market. In that sense, innovation works as a barrier to entry. Because monopolies do not bring maximum social utility, they are actively denounced by economists. The plain fact of the matter is, Innovation IS more effective under monopoly situation thant in competitive markets pattern.

The stumbling block in this issue is without doubt the treatment of information. Should the benevolent government -i.e. the public authorities- abandon te patent system ? Should it introduce some change in it ? As H. Varian, pointed it out, there could be various alternative economic models : the most novel and original one being the ‘cooperative’ innovation (with a paradigme far from the dominant one in economic theory) : Linux, an alternative operating system, improves and expands because a community of engineers and IT technicians want to contribute to the Linux project.

This authentic public behaviour might give ideas to the public authorities : why shouldn’t the innovation be a public good ? instead of being ‘produced’ in a competitive market, main innovations could be the fruits of public R&D, and at the reach of everyone. Firms, as well as other agents could expand it -to a minor or marginal scales-.

This proposal, of course, has to be discussed and expanded, but the idea of a public and free innovation monopoly could be a suitable answer to the problem.